Cheaper Buy-Let Properties More Popular

People who are looking into taking out buy to let mortgages are increasingly switching away from trying to buy property at the high end of the market. Instead it now appears that they are focusing on buying cheaper property because of the higher returns that they could potentially see on rent levels.

Recent research has revealed that new legislation, to be introduced in 2017, has led many landlords to begin focusing their investments on properties that are worth below £150,000. The results of the research are based upon more 250,000 searches that were entered into mortgage price comparison sites.

The investigation was carried out by the search engine provider Twenty7Tec and the mortgage broker Mortgage Advice Bureau. It will worry many of the people in charge of the government’s housing policy because of the increase in competition that this could lead to between first-time buyers and buy-let landlords. This is because it now appears that both of these groups will be focusing on affordable properties.

The market for buy-let properties has been expanding quickly in recent years; there were £16.4bn worth of buy-let mortgages in 2013 but more than £27.4bn in 2014. Total lending is now forecast to exceed £31bn in 2015.

The research revealed that the percentage of searches for properties that were worth less than £150,000 in the three months leading up to September was up to 35%. At the same time last year, this percentage only sat at around 21%. At the same time, the proportion of buyers that were looking for properties between £250,000 and £499,999 went down to 24% from 44%.

The head of lending at Mortgage Advice Bureau, Brian Murphy, said that the organisation had seen a big rise in the number of landlords looking into lower value properties.

“As rental demand remains strong nationwide, opting for a cheaper property can result in more attractive yields. It appears many landlords are looking to invest in areas outside the south of England, where property prices won ‘t hold them back from making a profit.”

There are many different landlords who are attempting to take advantage of the low levels of mortgage rates. Many are taking equity out of their existing portfolios in order to place deposits on further purchases.

Back in 2012, a landlord who wanted to purchase a home for £150,000 would have had to borrow at a loan to value ratio of 75%. House prices have since risen at around 5-9% per year. This means that their overall property value could have gone up by over 25% in that space of time. If this is the case then their loan to value rate could now have dropped to around 50%.

Mr Murphy went on to say:

“You could remortgage back up to 75 per cent or more and probably do it at rates cheaper than you were originally borrowing at?.?.?.?You can understand why the business has been growing at the rates it has.”

It is believed that this trend has been exacerbated by George Osborne’s new move to cut the level of mortgage interest tax relief that is available to landlords.

A landlord adviser at LettingFocus.com, David Lawrenson, said that the revisions have cut demand for higher-end property.

“By and large there ‘s going to be less advantage to gearing up and buying a larger property.”

The report also revealed that many people were now looking to take out mortgages in places other than the Southeast and London, in favour of places were rent is still fairly high but house values are lower. Mr Murphy said that this means that “you’re making a much better return pound for pound”.